JAPAN OTC EQUITY FUND, INC.
September 28, 2001
To Our Shareholders:
We present the Semi-Annual Report of the For the quarter ended August 31, 2001,
Japan OTC Equity Fund, Inc. (the "Fund") for the NAV of the Fund decreased by 15.9%.
the six months ended August 31, 2001. The Net During the same period, the TOPIX, the Nikkei
Asset Value per Share ("NAV") of the Fund Average Index, the OTC Index and the JASDAQ
decreased by 9.9% during the six months, Index declined by 15.7%, 19.1%, 16.5% and
reflecting the overall decline in the 19.3% respectively, in U.S. dollar terms. The
Japanese OTC market. The closing market price Yen appreciated by 0.1 % during the same
of the Fund on August 31, 2001, on the New period. The Fund outperformed the OTC Index
York Stock Exchange was $6.14 representing a and the JASDAQ Index by 0.6 percentage points
discount of 10.2% to the NAV of $6.84. The and 3.4 percentage points respectively.
net assets of the Fund amounted to
$108,411,395 on August 31, 2001.
The Portfolio
The TOPIX, consisting of all companies
listed on the Tokyo Stock Exchange (the The Fund's equity exposure increased
"TSE"), decreased by 12.2% and the Nikkei from 98.5% at February 28, 2001 to 99.4% at
Average Index (a price-weighted index of 225 August 31, 2001. The Fund was diversified
leading stocks on the TSE) declined by 17.8%, into 98 issues, of which 73 issues were OTC
in U.S. dollar terms, during the six months stocks, comprising 71.8% of the total
ended August 31, 2001. The Nikkei OTC Average portfolio on August 31, 2001.
Index (the "OTC Index"), a price-weighted
index of the quotations of the OTC registered
stocks, and the Index of the Japan Securities Japanese Economy and Stock Market Outlook
Dealers Association Quotation System (the
"JASDAQ Index"), a capitalization-weighted The OTC Index declined by 14.8%, in
index of all OTC stocks, decreased by 15.9% local currency terms, during the six months
and 22.5%, respectively, in U.S. dollar ended August 31, 2001, amid disappointing
terms, during the same period. The Japanese corporate news from both the U.S. and Japan,
yen (the "Yen") depreciated by 1.2% against and the poor domestic economic trends in
the U.S. dollar during the six months. Japan.
The Fund outperformed the OTC Index and In addition to signs of economic
the JASDAQ Index by 6.0 percentage points and retrenchment, growing disillusionment with
12.6 percentage points, respectively, during the policy inertia from the ruling Liberal
the six months ended August 31, 2001. Democratic Party ("LDP") compounded the
depressed market sentiment until mid-March.
However, the Japanese OTC stock market
regained upward momentum in the latter half to weigh heavily on the market throughout
of March, after the Bank of Japan ("BOJ") August. Although both the BOJ and the Federal
effectively returned to a zero interest rate Reserve Bank took further action to ease
policy with a form of quantitative easing monetary policy, these policy measures
with an implicit inflation target that will appeared to have little impact on either the
remain in place at least until the Consumer U.S. or the Japanese equity markets. The OTC
Price Index ("CPI") has stabilized. Index declined below the 1,200 level in late
August, for the first time since January.
In late April and early May, the
Japanese OTC stock market extended its During the quarter ended June 30, 2001,
recovery in anticipation of structural Japan's real Gross Domestic Product ("GDP")
reforms based on the policies outlined by new decreased by 3.2% (annualized) from the
Prime Minister Junichiro Koizumi and his previous quarter. Although private
cabinet. However, cautious sentiment returned consumption increased slightly, housing
due to the delay in clarifying the new investment, capital spending and exports all
government's intended policy measures. In declined sharply. Public works spending also
mid-June, the cabinet released a draft policy declined as the effect of last autumn's
document that included measures to expedite economic stimulus package dissipated. Also,
the disposal of banks' non-performing loans, it is widely expected that Japan will
the promotion of deregulation by stimulating register negative growth in the quarter ended
competitiveness in the private sector, and September 30, 2001. Massive cutbacks in
measures to alleviate the impact of the industrial production continue as the
structural reform program while stimulating inventory adjustment intensifies, especially
economic activity. Nevertheless, the Japanese in the area of producer goods impacted by
equity market seemed to be waiting to assess declining exports.
the full substance of the proposed reforms,
given the likelihood that they would have a However, some economic indicators, such
negative near-term impact on the Japanese as the U. S. Index of Leading Economic
economy. Indicators, the coincident-to-lagging
indicator ratio in Japan and the attainment
In July, the BOJ's Tankan survey and the ratio for machinery order forecasts, suggest
June Industrial Production figures that the Japanese economy may hit the bottom
highlighted the continuing deterioration in during the October-December period in terms
domestic fundamentals. In addition, a of year-on-year ("y-o-y") changes in the
continuous stream of corporate profit Industrial Production index. However, because
warnings and the absence of further of the short-term deflationary pressure that
clarification of Japan's structural reform may intensify as a result of Prime Minister
plans at the G8 Summit, also dampened Koizumi's structural reforms, any recovery
sentiment in the market. Meanwhile, the after the economy bottoms out is likely be
LDP-led governing coalition party won Japan's very gradual.
Upper House election by a clear margin on
July 29, 2001, but the result had relatively It is imperative that the government
little impact on the market. counter the deflationary pressure while
carrying out its pledge to limit the new
A constant stream of corporate profit government bond issuance to 30 trillion Yen.
warnings from technology companies and Therefore, the Koizumi government is expected
depressing domestic economic data continued to formulate some fiscal measures in
a bid to maintain the administration's Although underlying business momentum in
credibility. However, this raises the the electronics industry has been weaker than
possibility that bond issuance may exceed the expected, it seems that much of the negative
pledged limit. The stock market's sensitivity news is being gradually discounted in this
to a new program of fiscal expansion has sector. There are even signs that some
intensified the upward risk to long-term technology stocks, especially among the
interest rates toward the year-end. electronic component makers, have started to
bottom out, although the pace of recovery
Under these conditions, the Yen to one will depend on the strength of demand for
U.S. dollar exchange rate is expected to final products, such as personal computers
remain in a narrow range close to the 120 Yen ("PCs") and cell phones. One indication of
level for some time due to opposite and this trend is that some stocks now look
competing influences. The weak state of the relatively attractive considering that
Japanese economy and base money growth will current price to book ratios are decreasing
tend to weigh upon the Yen, while mounting to historically low levels, but offer growth
pressure by the Bush Administration to potential over the medium term.
retreat from a strong dollar policy will put
upward pressure on the Yen. Although defensive stocks are likely to
continue their out-performance for now, we
Given the deteriorating domestic economy believe the cycle has progressed to around
and declining exports, Japan's macro-economic 80% of its peak, based on views that the
fundamentals will offer little support to the worst point for the Japanese economy may be
OTC stock market for the time being. However, over soon. Therefore, we will not
the stock market's downside will be limited significantly raise our exposure to this
as inexpensive valuations and the BOJ's segment from current levels. Rather, we will
quantitative easing policy lend support. cautiously seek opportunities to increase our
exposure to technology stocks and cyclical
The Japanese OTC stock market valuations issues.
are now at approximately 17 times forecasted
earnings, which is close to the historical
low recorded in 1998. There is still scope
for a downward revision to corporate earnings
for this fiscal year given the depressed
economic conditions. However, the Japanese
OTC stock market does offer attractive value
over the longer term even after discounting
expected earnings downgrades.
Until the electronics industry and the
broader economy demonstrate signs of
recovery, we expect defensive stocks, with
inexpensive valuations and stable earnings,
to outpace the market for now as they attract
liquidity from leading companies with poor
earnings momentum.
In closing, we share the concerns of our We appreciate your continuing support of
shareholders with the terrorist actions on your Fund.
September 11, 2001 and we extend our sympathy
to the families of all of the victims. We Sincerely,
will continue to monitor world development
and to exercise caution in our management of Kazuhiko Hama
the Fund. President
SHAREHOLDERS ACCOUNT INFORMATION
Shareholders whose accounts are held in their own name may contact the
Fund's transfer agent, State Street Bank and Trust Company at (800) 426-5523
for information concerning their accounts.
-------------------------------------------------------------------------------
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The Board of Directors and officers of the Japan OTC Equity Fund, Inc.
take this opportunity to express their appreciation to Mr. Nobuo Katayama, who
resigned his positions as Director, President and Portfolio Manager of the
Fund effective June 15, 2001, in connection with his reassignment from
President of Nomura Asset Management U.S.A. Inc., the Fund's manager
("Manager"), to new duties at Nomura Asset Management Co. Ltd. ("NAM "), the
Fund's investment advisor and the parent company of the Manager. Mr. Katayama
had served as President of the Manager and as Director, President and
Portfolio Manager of the Fund since 1999.
The Board of Directors has elected Mr. Kazuhiko Hama to serve as the
President of the Fund and a member of its Board of Directors. Mr. Hama, who
succeeded Mr. Katayama as President of the Manager, also became the Portfolio
Manager of the Fund effective June 15, 2001. Mr. Hama was a director of NAM
(formerly The Nomura Securities Investment Trust Management Co., Ltd.) from
1996 to 1998, Senior Officer of NAM from 1999 to 2000 and Management Executive
of NAM from 2000 to the present.
NAM provides investment recommendations to the Manager regarding the
Fund's portfolio. As Portfolio Manager for the Fund and President of the
Manager, Mr. Hama is primarily responsible for the day-to-day portfolio
management of the Fund.
-------------------------------------------------------------------------------
JAPAN OTC EQUITY FUND, INC.
FUND HIGHLIGHTS-AUGUST 31, 2001
(Unaudited)
KEY STATISTICS
Net Assets...................................................... $108,411,395
Net Asset Value per Share....................................... $6.84
Closing NYSE Market Price....................................... $6.14
Percentage Change in Net Asset Value per Share*+................ (9.9%)
Percentage Change in NYSE Market Price*+........................ (10.9%)
MARKET INDICES
Percentage change in market indices:
Yen U.S.$
------ ------
TOPIX............................................................ (11.1%) (12.2%)
Nikkei Average................................................... (16.8%) (17.8%)
JASDAQ........................................................... (21.5%) (22.5%)
Nikkei OTC Average............................................... (14.8%) (15.9%)
*From March 1, 2001 through August 31, 2001.
+Reflects the percentage change in share price.
ASSET ALLOCATION
Japanese Equities
OTC Stocks................................................ 71.8%
TSE First and Second Section Stocks....................... 27.6
Cash and Cash Equivalents........................................ 0.7
------
Total Investments................................................ 100.1
Liabilities in Excess of Other Assets, Net....................... (0.1)
-------
Net Assets................................................ 100.00%
=======
INDUSTRY DIVERSIFICATION
% of % of
Net Assets Net Assets
---------- ----------
Retail................................... 17.4 Electric................................. 3.9
Chemicals and Pharmaceuticals............ 10.2 Machinery and Machine Tools.............. 3.2
Information and Software................. 10.0 Textiles and Apparel..................... 3.1
Services................................. 9.7 Restaurants.............................. 2.5
Food Manufacturing....................... 8.8 Automotive Equipment and Parts........... 2.2
Electronics.............................. 8.7 Real Estate and Warehouse................ 1.5
Miscellaneous Manufacturing.............. 8.1 Telecommunications....................... 0.8
Wholesale................................ 4.7 Transportation........................... 0.3
Banks and Finance........................ 4.3
TEN LARGEST EQUITY HOLDINGS BY MARKET VALUE
Market % of
Value Net Assets
Security ------ ----------
--------
Sanyo Electric Credit Co., Ltd.............................................. $3,091,590 2.9
Cawachi Limited............................................................. 2,883,918 2.7
Plenus Co., Ltd............................................................. 2,711,922 2.5
Otsuka Kagu Co., Ltd........................................................ 2,645,892 2.4
T & K Toka Co., Ltd......................................................... 2,514,339 2.3
Nippon Foundry Inc.......................................................... 2,511,054 2.3
Yaizu Suisankagaku Industry Co., Ltd........................................ 2,158,423 2.0
USS Co., Ltd................................................................ 2,122,373 2.0
Konami Computer Entertainment Tokyo. Inc.................................... 2,038,893 1.9
Uoriki Co., Ltd............................................................. 2,036,468 1.9
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
SCHEDULE OF INVESTMENTS
AUGUST 31, 2001
(Unaudited)
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
EQUITY SECURITIES
Automotive Equipment and Parts
Exedy Corp................................................. 132,400 $ 1,495,677 $914,372 0.8
Automobile clutches
Nippon Cable Systems Inc................................... 115,000 1,054,173 1,076,052 1.0
Control cables
SPK Corporation............................................ 45,600 590,497 399,795 0.4
Replacement parts ----------- --------- ----
Total Automotive Equipment and Parts....................... 3,140,347 2,390,219 2.2
----------- --------- ----
Banks and Finance
Aiual Corporation.......................................... 17,050 1,440,881 1,542,233 1.4
Consumer loans
Sanyo Electric Credit Co., Ltd............................. 106,400 3,582,788 3,091,590 2.9
Finance ----------- --------- ----
Total Banks and Finance.................................... 5,023,669 4,663,823 4.3
----------- --------- ----
Chemicals and Pharmaceuticals
Arisawa Manufacturing Co., Ltd............................. 24,100 453,599 432,332 0.4
Glassfibers and insulating resins
C. Uyemura & Co., Ltd...................................... 99,000 2,078,276 1,309,050 1.2
Chemicals
FP Corporation............................................. 18,900 863,218 668,548 0.6
Polystyrene and other synthetic resin foodware
Konishi Co., Ltd........................................... 124,800 1,401,381 1,208,742 1.1
Adhesives and construction sealants
Mandom Corporation......................................... 101,000 1,417,366 1,573,672 1.5
Cosmetic products
Matsumoto Yushi-Seiyaku Co., Ltd........................... 97,000 1,815,924 1,576,704 1.5
Analgesic anti-inflammatory agents
Milton Co., Ltd............................................ 46,700 1,082,866 1,533,920 1.4
Hair-care products for beauty salons
T & K Toka Co., Ltd........................................ 126,500 3,521,332 2,514,339 2.3
Ink for printing
Ube-Nitto Kasei Co., Ltd................................... 65,000 189,586 232,661 0.2
Resins ----------- --------- -----
Total Chemicals and Pharmaceuticals........................ 12,823,548 11,049,968 10.2
----------- --------- -----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Electric
Citizen Electronics Co., Ltd............................... 32,200 1,468,819 1,396,639 1.3
Electric parts
Eneserve Corporation....................................... 37,000 1,396,458 1,791,805 1.6
Electric generation system for supermarkets
Mirai Industry Co., Ltd.................................... 116,000 $1,777,000 $1,060,008 1.0
Plastic molded electric materials ----------- --------- -----
Total Electric............................................. 4,642,277 4,248,452 3.9
----------- --------- -----
Electronics
Chiyoda Integre Co., Ltd................................... 126,600 1,836,629 1,108,889 1.0
Electronic components
Cosel Co., Ltd............................................. 59,000 1,698,071 665,852 0.6
Electric machinery
Digital Electronics Corp................................... 39,400 1,019,149 554,158 0.5
Electronic components
Fuji Electric Industry Co., Ltd............................ 93,000 993,449 462,122 0.4
Electronic parts
Fukuda Denshi Co........................................... 39,000 961,762 1,116,773 1.0
Medical electronic equipment
Japan CBM Corp............................................. 98,100 2,408,169 575,042 0.6
Electronic calculators and watches
Kuroda Electric Co., Ltd................................... 94,400 2,124,568 1,613,947 1.5
Trader
Miyota Co., Ltd............................................ 63,000 995,776 429,781 0.4
Watches, quartz oscillators and electronic image
equipment
Nagano Keiki Co., Ltd...................................... 49,900 1,006,321 991,822 0.9
Measuring instruments
Nissho Electronics Corp.................................... 43,000 1,430,395 836,569 0.8
Electronics parts distributor
Roland Corporation......................................... 46,000 910,132 581,126 0.6
Electronic keyboard for musical instruments
Tamagawa Electronics Co., Ltd.............................. 88,000 2,299,845 437,276 0.4
Devices for wireless telecommunications ----------- --------- -----
Total Electronics.......................................... 17,684,266 9,373,357 8.7
----------- --------- -----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Food Manufacturing
Ariake Japan Co., Ltd.................................... 19,900 542,575 1,139,681 1.0
Natural seasonings
Iwatsuka Confectionery Co., Ltd.......................... 92,000 876,013 813,576 0.8
Rice Crackers
Kakiyasu Honten Co., Ltd................................. 44,000 468,144 744,852 0.7
Processed meat products, fresh meats, and side dishes
Origin Toshu Co., Ltd.................................... 30,500 588,393 847,686 0.8
Delicatessen items and lunch boxes
Ozeki Co., Ltd........................................... 12,000 1,132,929 353,729 0.3
Supermarket chains
Plenus Co., Ltd.......................................... 64,400 2,806,886 2,771,922 2.5
Japanese lunch-boxes
Raise Co., Ltd........................................... 114,000 1,606,660 720,091 0.7
Supermarket chain
Yaizu Suisankagaku Industry Co., Ltd..................... 154,200 2,448,395 2,158,423 2.0
Natural seasonings and dehydrated processed food ----------- --------- -----
materials
Total Food Manufacturing................................. 10,469,995 9,489,960 8.8
----------- --------- -----
Information and Software
Argo Graphics Inc........................................ 46,000 1,133,741 1,123,511 1.0
Computer aided design software
CAC Corp................................................. 51,500 2,250,195 1,925,801 1.8
Information technology services
Fuji Soft ABC Inc........................................ 18,800 928,703 859,763 0.8
Computer systems development
Fujitsu Broad Solution & Consulting Inc.................. 44,500 1,794,921 835,769 0.7
Business application Software.
Konami Computer Entertainment Tokyo, Inc................. 144,100 1,891,244 2,038,893 1.9
Video games software
Nippon Foundry Inc....................................... 445 4,627,565 2,511,054 2.3
Semiconductor memory chips
Trend Micro Inc.......................................... 27,000 2,058,341 410,679 0.4
Computer software anti-virus server
Yahoo Japan Corp.+....................................... 63 11,237,066 1,177,917 1.1
Internet services ----------- --------- -----
Total Information and Software........................... 25,921,776 10,883,387 10.0
----------- --------- -----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Machinery and Machine Tools
Disco Corp............................................... 15,500 1,151,460 592,664 0.6
Dicing saws for semiconductors
Seikoh Giken Co., Ltd.................................... 12,400 4,688,050 337,323 0.3
Optical connectors and polishing machines
Suruga Seiki Co., Ltd.................................... 20,000 540,974 328,463 0.3
Industrial mechanical equipment
THK Co., Ltd............................................. 78,700 3,419,652 1,020,744 0.9
Linear motion systems for industrial machines
Yushin Precision Equipment Co., Ltd...................... 41,600 2,017,235 1,180,713 1.1
Injection molding related machinery ----------- --------- -----
Total Machinery and Machine Tools........................ 11,817,371 3,459,907 3.2
----------- --------- -----
Miscellaneous Manufacturing
Central Glass Co., Ltd................................... 336,000 1,759,202 1,726,197 1.6
Glass products
Eidai Kako Co., Ltd...................................... 144,000 1,085,863 574,860 0.5
Synthetic resin processed products
Fuji Seal,Inc............................................ 27,200 933,475 847,602 0.8
Packing materials
Fujimi Inc............................................... 51,900 1,761,108 874,215 0.8
Polishing materials for silicone wafers
Hoden Seimitsu Kato Kenkyusho Co., Ltd................... 62,000 1,015,687 835,474 0.8
Aluminium extruding molds
Nichiha Corporation...................................... 139,400 1,253,191 1,414,722 1.3
Ceramic exterior walls and fiberboards
Nippon Kodoshi Corp...................................... 167,000 2,688,750 1,097,065 1.0
Paper and electric insulation
Tomy Co., Ltd............................................ 83,100 2,721,673 1,393,457 1.3
Toys ----------- --------- -----
Total Miscellaneous Manufacturing........................ 13,218,949 8,763,592 8.1
----------- --------- -----
Real Estate and Warehouse
Nippon Kanzai Co., Ltd................................... 87,800 1,303,227 1,626,816 1.5
Comprehensive building maintenance ----------- --------- -----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Restaurants
Saint Marc Co., Ltd...................................... 54,800 1,558,380 1,661,515 1.5
Restaurants and baker shop chains
Watami Food Service Co., Ltd............................. 33,900 1,007,695 1,056,386 1.0
Restaurant chain ----------- --------- -----
Total Restaurants........................................ 2,566,075 2,717,901 2.5
----------- --------- -----
Retail
C&S Co., Ltd............................................. 35,316 957,100 1,085,640 1.0
Convenience store chain
Cawachi Limited.......................................... 54,700 3,052,774 2,883,918 2.7
Drug store chain
Chiyoda Co., Ltd......................................... 87,300 576,585 580,848 0.5
Specialty store chains
Doutor Coffee Co......................................... 8,600 689,051 572,199 0.5
Coffee
Himaraya Co., Ltd......................................... 200 2,504 547 0.0
Sporting goods
Japan Care Service Corporation............................ 105,000 1,656,870 619,026 0.6
Medical equipment and supplies
Kyoto Kimono Yuzen Co., Ltd............................... 348 1,894,264 1,582,684 1.5
Japanese traditional kimonos
Otsuka Kagu, Ltd.......................................... 40,800 2,967,196 2,645,892 2.4
Furniture
Ryohin Keikaku Co., Ltd................................... 21,400 1,337,957 459,595 0.4
Clothes, sundry goods, and foods
Saizeriya Co., Ltd........................................ 30,420 1,263,601 1,081,167 1.0
Italian restaurant chain
Toys R Us-Japan, Ltd...................................... 17,000 2,277,450 1,431,760 1.3
Toy chain store
Uoriki Co., Ltd........................................... 156,000 3,346,730 2,036,468 1.9
Fresh fish and sushi stores
USS Co., Ltd.............................................. 60,000 1,428,556 2,122,373 2.0
Automobile auction
Yamada Denki Co., Ltd..................................... 25,000 2,083,372 1,711,795 1.6
Consumer electronics ----------- ----------- -----
Total Retail.............................................. 25,534,010 18,813,912 17.4
----------- ----------- -----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Services
Arrk Corporation.......................................... 20,000 484,072 690,614 0.6
Product testing
Bellsystem 24, Inc........................................ 3,100 1,015,540 1,138,333 1.1
Telemarketing
Central Sports Co., Ltd................................... 66,100 768,084 590,104 0.5
Health and fitness clubs
Future System Consulting Corporation...................... 138 1,541,190 1,115,762 1.0
Information system and consulting services
Medical Support Co., Ltd.................................. 157,000 3,331,323 846,254 0.8
Nursing home caterer
N.I.C. Corporation........................................ 67,000 1,182,474 761,780 0.7
Human resources
Net One Systems Co., Ltd.................................. 129 2,040,124 1,705,731 1.6
Computer network systems for LAN, ATM
Okinawa Cellular Telephone Co............................. 175 447,015 215,185 0.2
Cellular telephone service
Toei Animation Co., Ltd................................... 12,000 634,388 596,286 0.6
Animated cartoon movies production
Tow Co., Ltd.............................................. 147,000 1,436,793 1,609,466 1.5
Entertainment
Universal Homes Inc....................................... 42 723,090 141,492 0.1
Plan, design, market and build houses
Weathernews Inc........................................... 83,000 1,120,731 1,132,438 1.0
Custom weather forecasting services ----------- ---------- ----
Total Services............................................ 14,724,824 10,543,445 9.7
----------- ----------- ----
Telecommunications
Nippon Antenna Co., Ltd................................... 57,000 945,374 580,873 0.5
Communication related equipment
Yozan Inc.+............................................... 31 1,265,035 271,529 0.3
Mobile telecommunication equipment ----------- --------- ----
Total Telecommunications.................................. 2,210,409 852,402 0.8
----------- --------- ----
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
Textiles and Apparel
United Arrows Limited................................... 68,400 1,375,756 1,987,451 1.8
Casual clothes
World Co., Ltd.......................................... 42,700 1,313,507 1,348,592 1.3
Fashion apparel ----------- --------- ----
Total Textiles and Apparel.............................. 2,689,263 3,336,043 3.1
----------- --------- ----
Transportation
Yusen Air & Sea Service Co., Ltd........................ 36,800 684,213 390,517 0.3
International air cargo transporter ----------- --------- ----
Wholesale
ArcLand Sakamoto Co., Ltd............................... 110,600 1,363,176 1,695,305 1.6
Home appliances
C-Two-Network Co., Ltd.................................. 14,700 846,079 796,067 0.7
Processed foods
Hakuto Co., Ltd......................................... 50,000 1,187,077 673,769 0.6
Electric parts
Inaba Denkisangyo Co.................................... 68,900 852,310 829,806 0.8
Electrical equipment
Shinwa Co., Ltd......................................... 73,810 769,423 671,367 0.6
Industrial machinery
Topa, Inc............................................... 67,000 1,015,391 462,711 0.4
Trading company for control systems ----------- --------- ----
Total Wholesale......................................... 6,033,456 5,129,025 4.7
----------- --------- ----
TOTAL INVESTMENTS IN EQUITY SECURITIES................ 158,487,675 107,702,726 99.4
----------- --------- ----
INVESTMENTS IN FOREIGN CURRENCY
State Street Bank and Trust Company, 0.25% interest
bearing call account.................................. JPY 7,815,195 65,470 65,820 0.1
TOTAL INVESTMENTS IN FOREIGN CURRENCY.................... 65,470 65,820 0.1
See notes to financial statements
Market % of Net
Shares Cost Value Assets
------ ---- ------ --------
INVESTMENTS IN SHORT-TERM SECURITIES
Euro-Dollar Time Deposit
State Street Bank and Trust Company, interest bearing
call account 3.25% due 9/04/01....................... 741,446 741,446 741,446 0.6
----------- --------- ----
TOTAL INVESTMENTS IN SHORT-TERM SECURITIES.............. 741,446 741,446 0.6
----------- --------- ----
TOTAL INVESTMENTS....................................... 159,294,591 108,509,992 100.1
----------- --------- ----
LIABILITIES IN EXCESS OF OTHER ASSETS, NET ............. (101,502) (98,597) (0.1)
----------- --------- ----
NET ASSETS.............................................. $159,193,089 $108,411,395 100.0
============ ============ =====
+Non-income producing security.
Portfolio securities and foreign currency holdings were translated
at thefollowing exchange rate as of August 31, 2001.
Japanese Yen JPY(Y)118.735 = $1.00
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2001
(Unaudited)
ASSETS:
Investments in securities, at market value (cost-- $158,487,675)............................. $107,702,726
Investments in short-term securities, at market value (cost-- $741,446)...................... 741,446
Investments in foreign currency, at market value (cost-- $65,470)............................ 65,820
Receivable for investments sold.............................................................. 545,541
Receivable for dividends and interest, net of withholding taxes.............................. 64,967
Prepaid expenses............................................................................. 11,642
--------------
Total Assets........................................................................... 109,132,142
--------------
LIABILITIES:
Payable for investments purchased........................................................... 490,191
Accrued management fee...................................................................... 92,189
Other accrued expenses...................................................................... 138,367
--------------
Total Liabilities..................................................................... 720,747
--------------
NET ASSETS:
Capital stock (par value of 15,846,384 shares of capital stock outstanding, authorized
100,000,000, par value $0.10 each......................................................... 1,584,638
Paid-in capital............................................................................. 169,465,177
Accumulated net realized loss on investments and foreign currency transactions.............. (11,358,126)
Unrealized net depreciation on investments and foreign exchange............................. (50,781,694)
Accumulated net investment loss............................................................. (498,600)
--------------
Net Assets............................................................................ $108,411,395
==============
Net asset value per share................................................................... $6.84
==============
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 2001
(Unaudited)
INCOME
Dividend income (less $88,336 withholding taxes).................................. $ 500,572
Interest income................................................................... 9,876
-------------
Total Income............................................................. $ 510,448
--------------
EXPENSES:
Management fee.................................................................... 611,254
Custodian fee..................................................................... 112,424
Legal fees........................................................................ 77,720
Shareholder reports............................................................... 32,632
Registration fees................................................................. 30,144
Auditing and tax reporting fees................................................... 25,944
Directors' fees and expenses...................................................... 22,240
Annual meeting expenses........................................................... 14,592
Transfer agency fees.............................................................. 10,120
Miscellaneous..................................................................... 4,968
Insurance......................................................................... 4,104
-------------
Total Income............................................................. 946,142
--------------
INVESTMENT LOSS - NET............................................................. (435,694)
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Realized loss on investments and foreign currency transactions: ..................
Net realized loss On investments.................................................. (5,710,963)
Net realized loss on foreign exchange............................................. (3,831,017)
--------------
Net realized loss on investments and foreign exchange............................. (9,541,980)
--------------
Change in net unrealized appreciation on translation of foreign currency and other
assets and liabilities denominated in foreign currency......................... 1,959,588
Change in net unrealized depreciation on investments.............................. (3,845,334)
--------------
Net realized and unrealized loss on investments and foreign exchange.............. (11,427,726)
--------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................. ($11,863,420)
==============
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months For the Year
Ended August 31, 2001 Ended
(Unaudited) February 28, 2001
(Audited)
------------------- -------------------
FROM INVESTMENT ACTIVITIES:
Net investment loss............................................... $ (435,694) $ (1,397,744)
Net realized gain/(loss) on investments........................... (5,710,963) 23,031,899
Net realized gain/(loss) on foreign exchange...................... (3,831,017) 437,488
Change in net unrealized depreciation on investments and foreign
exchange........................................................ (1,885,746) (148,569,325)
------------------- -------------------
Decrease in net assets derived from investment activities......... (11,863,420) (126,497,682)
------------------- -------------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Long Term Capital Gains ($0.82 per share)......................... 0 (12,993,975)
Net Investment Income ............................................ 0 0
------------------- -------------------
Decrease in net assets derived from distributions to shareholders. 0 (12,993,975)
Net decrease in net assets........................................ (11,863,420) (139,491,657)
------------------- -------------------
NET ASSETS:
Beginning of period............................................... 120,274,815 259,766,472
------------------- -------------------
End of period (including accumulated net investment losses of
$498,600 and $62,906, respectively)............................ $ 108,411,395 $ 120,274,815
=================== ====================
See notes to financial statements
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. Significant Accounting Policies
Japan OTC Equity Fund, Inc. (the "Fund") available, at the mean of the bid and
is registered under the Investment Company offer price at the close of business on such
Act of 1940 as a non-diversified, closed-end day or, if none is available, the last
management investment company. The Fund was reported sales price. Portfolio securities
incorporated in Maryland on January 25, 1990 which are traded on stock exchanges are
and investment operations commenced on March valued at the last sales price on the
21, 1990. The Fund issued to its shareholders principal market on which securities are
of record as of the close of business on traded or lacking any sales, at the last
October 25, 1999 non-transferable Rights to available bid price. Short-term debt
subscribe for up to an aggregate of 3,80,940 securities which mature in 60 days or less
shares of Common Stock of the Fund at a rate are valued at amortized cost if their
of one share of Common Stock for three Rights original maturity at the date of purchase was
held ("Primary Subscription"). The Fund had 60 days or less, or by amortizing their value
the ability to increase the number of shares on the 61st day prior to maturity if their
subscribed for in this offering by up to 25% term to maturity at the date of purchase
of the Primary Subscription, or an additional exceeded 60 days. Securities and other assets
951,235 shares, to honor record date for which market quotations are not readily
shareholder requests to purchase more shares. available are valued at fair value as
During November 1999, the Fund issued a total determined in good faith by or under the
of 4,458,565 shares of Common Stock on direction of the Board of Directors of the
exercise of such Rights at the subscription Fund.
price of $11.99 per share, compared to a net
asset value per share of $16.20 and a market (b) Foreign Currency Transactions -
value per share of $12.6875. Additionally, a Transactions denominated in Japanese yen are
sales load of 3.75% was charged to each share recorded in the Fund's records at the current
issued. Right offering costs of approximately prevailing rate at the time of the
$546,000 and the sales load were charged transaction. Asset and liability accounts
directly against the proceeds of the Rights that are denominated in yen are adjusted to
Offering. The following is a summary of reflect the current exchange rate at the end
significant accounting policies followed by of the period. Transaction gains or losses
the Fund. resulting from changes in the exchange rate
during the reporting period or upon
(a) Valuation of Securities - settlement of foreign currency transactions
Investments traded in the over-the-counter are included in operations for the current
market are valued at the last reported sales period.
price as of the close of business on the day
the securities are being valued or, if none The net assets of the Fund are presented
is at the exchange rate and market values at the
end of the period. The Fund isolates that
portion of the change in unrealized
appreciation (depreciation) included in the
statement of operations arising as a result
of changes in Japanese yen rates at August
31, 2001 on investments and other assets and
liabilities. Net realized foreign exchange under the Internal Revenue Code and to
gains or losses includes gains or losses distribute within the allowable time limit
arising from sales of portfolio securities, all taxable income to its shareholders.
sales and maturities of short-term
securities, currency gains or losses realized Under Japanese tax laws, a withholding
between the trade and settlement dates on tax is imposed on dividends at a rate of 15%
securities transactions, the difference and on interest at a rate of 10% and such
between the amounts of dividends, interest, withholding taxes are reflected as a
and foreign withholding taxes recorded on the reduction of the related revenue. There is no
Fund's books, and the U.S. dollar equivalent withholding tax on realized gains.
of the amounts actually received or paid.
(e) Capital Account Reclassification -
(c) Security Transactions, Investment For the year ended February 28, 2001, the
Income and Distributions to Shareholders - Fund's accumulated net realized loss was
Security transactions are accounted for on decreased by $144,577 and paid in capital was
the trade date. Dividend income and decreased by $1,570,612, with an offsetting
distributions are recorded on the ex-dividend decrease in accumulated net investment loss
date and interest income is recorded on the of $1,426,035. This adjustment was primarily
accrual basis. Realized gains and losses on the result of the reclassification of foreign
the sale of investments are calculated on the currency gains and reclassification of the
identified cost basis. net operating loss.
Distributions from net investment income (f) Use of Estimates in Financial
and net realized gains are determined in Statement Preparation - The preparation of
accordance with Federal income tax financial statements in accordance with
regulations, which may differ from generally generally accepted accounting principles
accepted accounting principles. To the extent requires management to make estimates and
these "book/tax" differences are permanent in assumptions that affect the reported amounts
nature (i.e., that they result from other and disclosures in the financial statements.
than timing of recognition - "temporary"), Actual results could differ from these
such accounts are reclassified within the estimates.
capital accounts based on their Federal
tax-basis treatment; temporary differences do (g) Concentration of Risk - A
not require reclassification. Dividends and significant portion of the Fund's net assets
distributions which exceed net realized gains consists of Japanese securities which involve
for financial reporting purposes, but not for certain considerations and risks not
tax purposes, are reported as distributions typically associated with investments in the
in excess of net realized gains. United States. In addition to the smaller
size, and greater volatility, there is often
(d) Income Taxes - A provision for substantially less publicly available
United States income taxes has not been made information about Japanese issuers than there
since it is the intention of the Fund to is about U.S. issuers. Future economic and
qualify as a regulated investment company political developments in Japan could
adversely affect the value of securities in
which the
Fund is invested. Further, the Fund accrued fees to the Manager of $611,254 for
may be exposed to currency devaluation and the six months ended August 31, 2001. Under
other exchange rate fluctuations. the Investment Advisory Agreement, the
Manager informed the Fund that the Investment
2. Management Agreement and Transactions Adviser earned fees of $275,832 for the six
With Affiliated Persons months ended August 31, 2001, At August 31,
2001. the fee payable to the Manager, by the
Nomura Asset Management U.S.A. Inc. acts Fund, was $92.189.
as the Manager of the Fund pursuant to a
management agreement. Under the agreement, Certain officers and/or directors of the
the Manager provides all office space, Fund are officers and/or directors of the
facilities and personnel necessary to perform Manager. The Nomura Securities Co.. Ltd. (the
its duties. Pursuant to such management Manager's indirect parent) and affiliates
agreement, the Manager has retained its earned $5,658 in commissions on the execution
parent company, Nomura Asset Management Co., of portfolio security transactions for the
Ltd. (the "Investment Adviser"), to act as six months ended August 31, 2001. The Fund
investment adviser for the Fund. pays each Director not affiliated with the
Manager an annual fee of $5,000 plus $500 per
As compensation for its services to the meeting attended, together with such
Fund, the Manager receives a monthly fee at Director's actual expenses related to
the annual rate of 1.10% of the value of the attendance at meetings. Such fees and
Fund's average weekly net assets not in expenses for unaffiliated Directors
excess of $50 million, 1.00% of the Fund's aggregated $22,240 for the six months ended
average weekly net assets in excess of $50 August 31, 2001.
million but not exceeding $100 million, .90%
of the Fund's average weekly net assets in 3. Purchases and Sales of Investments
excess of $100 million but not in excess of
$175 million and .80% of the Fund's average Purchases and sales of investments,
weekly net assets in excess of $175 million. exclusive of investments in foreign
For services Performed under the Investment currencies and short-term securities, for the
Advisory Agreement, the Investment Adviser six months ended August 31, 2001 were
receives a monthly fee from the Manager at $26,525,316 and $25,618,193, respectively.
the annual rate of .50% of the Fund's average
weekly net assets not in excess of $50 As of, August 31, 2001, net unrealized
million, .45% of the Fund's average weekly depreciation on investments exclusive of
net assets in excess of $50 million but not investments in foreign currency and
in excess of $100 million, .40% of the Fund's short-term securities for Federal income tax
average weekly net assets in excess of $100 purposes was $50,784,949 of which $5,560,970
million but not in excess of $175 million and related to appreciated securities and
.35% of the Fund's average weekly net assets $56,345,919 related to depreciated
in excess of $175 million. Under the securities. The aggregate cost of
Management Agreement, the Fund paid or investments, exclusive of investments in
foreign currencies and short-term securities
of $806,916, at August 31, 2001 for Federal
income tax purposes was $158,487,675. In
accordance with U.S. Treasury regulations, are treated for tax purposes as arising on
the Fund elected to defer $62,906 of net March 1, 2001. The Fund utilized
realized foreign currency losses and approximately $12,436,000 of capital loss
$2,114,726 of net realized capital losses carryover.
arising after October 31, 2000. Such losses
JAPAN OTC EQUITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS--Continued
FINANCIAL HIGHLIGHTS
Selected per share data and ratios for a share of common stock outstanding throughout the period.
For the Six
Months ended For the Year Ended
August 31, 2001 February 28, February 29, February 28,
(Unaudited) 2001 2000 1999 1998 1997
--------------- ------------ ----------- --------- --------- --------
Net asset value, beginning of year..... $7.59 $16.39 $5.86 $4.85 $6.44 $7.82
----- ------ ------ ------ ------ ------
Rights Offering costs*................. - - (0.16) - - -
----- ------ ------ ------ ------ ------
Net investment loss................. (0.03) (0.09) (0.11) (0.04) (0.06) (0.09)
Net realized and unrealized gain
(loss) on investments and foreign
currency.......................... (0.72) (7.89) 11.99 1.06 (1.45) (1.25)
----- ------ ------ ------ ------ ------
Total from investment operations.... (0.75) (7.98) 11.88 1.02 (1.51) (1.34)
Distributions to shareholders from:
Net realized capital gains.......... - (0.82) - - - -
Net investment income............... - - - (0.01) (0.08) 0.04)
Total distributions.................... 0.00 (0.82) 0.00 (0.01) (0.08) (0.04)
----- ------ ------ ------ ------ ------
Decrease in net asset value due to
shares issued through Rights
Offering*........................... - - (1.19) - - -
----- ------ ------ ------ ------ ------
Net asset value, end of period......... $6.84 $7.59 $16.39 $5.86 $4.85 $6.44
===== ====== ====== ====== ====== ======
Market value, end of period............ $6.14 $6.89 $11.000 $6.250 $5.750 $6.375
Total investment return+............... (10.9%) (1.31%) 76.0% 8.8% (8.5%) (24.6%)
Net asset value total return++.......... (9.9%) (49.1%) 179.7% (20.9%) (23.4%) (17.2%)
Ratio to average net
assets/supplemental data:
Net assets, end of period: (in 000). $108,411 $120,275 $259,766 $66,740 $55,246 $73,288
Operating expenses.................. 1.60%+ 1.33% 1.33% 1.80% 1.71% 1.70%
Net investment loss................. (0.74%)+ (0.76%) (0.88%) (0.82%) (1.0%) (1.1%)
Portfolio turnover.................. 22% 78% 50% 35% 29% 71%
+ Based on market value per share, adjusted for reinvestment of income dividends and long term capital gain
distributions, and capital share transactions. Total return does not reflect sales commissions.
++ Based on net asset value per share, adjusted for reinvestment of income dividends and long term capital gain
distributions, and capital share transactions. Total return does not reflect sales commissions.
* Decrease is due to Rights Offering (see note 1).
+ Annualized.
=========================================================
BOARD OF DIRECTORS
William G. Barker, Jr.
Kazuhiko Hama
Chor Weng Tan
Arthur R. Taylor
John F. Wallace
OFFICERS
Kazuhiko Hama, President
Heisuke Haruguchi, Vice President
Kenneth L. Munt, Vice President
David G. Stoeffel, Vice President
John J. Boretti, Secretary and Treasurer
Rita Chopra, Assistant Treasurer
MANAGER JAPAN
Nomura Asset Management U.S.A. Inc. OTC Equity
182 Maiden Lane Fund, Inc.
New York, New York 10038-4936
Internet Address
www.nomura-asset.com
INVESTMENT ADVISOR
Nomura Asset Management Co., Ltd.
1414 2-chome Nihonbashi, Chuo-ku,
Tokyo 103-8260, Japan
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER AGENT AND
REGISTRAR
State Street Bank and Trust Company
P.O. Box 8209
Boston, Massachusetts 02266-8209
COUNSEL
Sidley Austin Brown & Wood LLP
875 Third Avenue
New York, New York 10022
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036-2798 SEMI-ANNUAL REPORT
JAPAN OTC EQUITY FUND, INC. AUGUST 31, 2001
180 MAIDEN LANE
NEW YORK, NEW YORK 10038-4936
This Report, including the Financial
Statements, is transmitted to the
Shareholders of Japan OTC Equity Fund, Inc.
for their information. This is not a
prospectus, circular or representation
intended for use in the purchase of shares of
the Fund or any securities mentioned in the
Report.
The accompanying Financial Statements,
including the Schedule of Investments, have
not been examined by the Fund's independent
accountants, PricewaterhouseCoopers LLP, and
accordingly, they express no opinion thereon.
=========================================================